Much of the financial crisis was caused by excessively loose monetary policy, evidenced by interest rates in 2003-2005 being much lower than would have been expected based on the monetary policy that worked well during the long expansions of the 1980s and 1990s, as measured by the Taylor rule.

Low rates encouraged excess risk-taking through a self-reinforcing feedback loop: rising housing prices gave borrowers incentive to keep paying and not default, which misled underwriters into thinking investments were less risky, so more investments were made on that assumption — a process that reversed when prices leveled off and delinquencies and foreclosures rose.

Traditional money measures like M2 became unreliable because technological and regulatory changes let people make payments without traditional money forms; this is why central bankers and policy rules like the Taylor rule focused on interest rates to stand in for hard-to-measure money growth.

The fall 2008 panic was probably not caused primarily by the Lehman Brothers bankruptcy: the major market movements (S&P 500 dropping 28% in three weeks, surging money-market spreads, global export collapse) occurred at least 10 days to two weeks after Lehman, coinciding with the government publicly warning of disaster to sell the TARP program, which itself scared markets.

Good monetary policy under the Taylor rule means the central bank's interest rate adjusts by a sufficient (quantifiable) amount when inflation or GDP rises or falls — rising at least as much as inflation increases, and being cut by specified amounts during recessions — which allows specific measurement and comparison against actual policy.

The global savings glut explanation for low long-term rates has factual problems: measured global savings rates in that period were actually lower than in the 70s, 80s, and most of the 90s; Greenspan's fallback to intended-versus-desired savings is essentially unmeasurable and thus an unsubstantiable argument.

The US version of quantitative easing was not the general 'inject reserves to drive rates to zero' Japanese variety, but rather targeted purchases of specific securities (medium-term Treasuries, mortgage-backed securities) aimed at affecting their yields directly — evidenced by the fact that balance-sheet expansion began the week of September 17th when the funds rate was still at 2%, before the FOMC even voted to cut rates, and it was the expansion itself that drove the rate to zero.

Some form of rule-based thinking about the interest-rate instrument — beyond a pure inflation target, perhaps something specifying movements of the instruments — is a productive way to constrain the Fed; policy rules served as good guidelines historically, don't need to be perfect, but are hard to legislate.

The February 2008 Bush stimulus package and the 2009 stimulus package had very little impact, which is further evidence that the crisis dynamics were largely policy-induced and that markets stabilized long before the fiscal packages were enacted.

The Great Moderation's long expansions and short recessions were the result of good monetary policy and a better understanding of its impact (including the importance of expectations), evidenced by the pattern that bad policy in the 1970s produced bad results, good policy in the 80s and 90s produced good results, and getting off that good policy again produced the recent crisis.

The Fed does not literally set the federal funds rate; it injects or extracts bank reserves (changes the money supply) so that the actual overnight interbank rate is brought into line with the FOMC's target.

The Fed kept rates excessively low because of well-intentioned efforts to prevent something worse — primarily a fear of deflation and continued worry about the aftermath of 9/11 and the bursting dot-com bubble — not because of bad intentions or incompetence.

Holding the federal funds rate at 1% in early 2004 — nearly three years after the 2001 recession ended, while the economy and inflation were rising — represented a long period where rates were the lowest in the previous 40 years, amounting to injecting too much money into the banking system.

Easy money causes excesses but you cannot predict where they will show up; based on 1960s and 70s experience, monetary policy did induce booms and slumps in housing, making housing a logical place for the excess to occur this time.

Low federal funds rates transmitted to the housing boom through two channels: lowering adjustable-rate mortgage rates (about 30% of mortgages, a rising fraction, often at low teaser rates) which increased housing demand, and through the term structure feeding short rates into the long rates that 30-year mortgages depend on.

The 'conundrum' of long-term rates failing to rise when the Fed began raising short rates was likely because market participants were unsure whether the Fed was permanently abandoning the policies of the 80s and 90s, so much of the long-rate adjustment was a surprise.

If each central bank simply did what was right for its own country (keeping its inflation low and creating stability), the world would have very good performance overall — meaning much explicit international coordination is unnecessary, though it remains useful to ensure no central bank makes life difficult for its counterparts.

OECD research found a high correlation across countries between the degree to which a nation's interest rate was below its estimated Taylor-rule level and the size of its housing boom, including Spain and Ireland — providing evidence that the loose-money-causes-housing-boom mechanism works globally, not just in the US.

Monetary policy transmits globally through exports/imports (via exchange rates), capital flows (via interest rate differentials), and a tendency for small open economies to follow large economies' rates — e.g. if the US cuts rates and Sweden's Riksbank does not, the Swedish currency appreciates, pressuring it to follow.

Disruptions in financial markets come from surprises — unanticipated events markets cannot discount; the Lehman problem was that after the Bear Stearns intervention markets expected Lehman to be bailed out too, so the non-bailout was a surprise, whereas a clear strategy articulated right after Bear Stearns would have substantially reduced the impact.